Planning Policy Strategy and Energy, Part III

In Parts I and II of this article, I discussed the concepts of planning, policy, and strategy and connected them with the phenomenon of Peak Oil. My goal was and is to promote thinking about what can be called a true “energy strategy.” (As opposed to the “What, me worry?” strategy that presently dominates public policy.)

In outlining my arguments, I borrowed extensively from the political, policy, and strategic ideas of Karl von Clausewitz, set out in his historical study of policy and strategy, On War, published in 1832.

But I believe that the ideas Clausewitz developed have much broader scope than just in the martial arena, and particular applicability to the Peak Oil world and what will follow.

More Policy, Strategy, and Energy

At the end of Part II, I was discussing the national-level U.S. warfighting policy and strategy during World War II. I described the policy and strategic context of some of the major decisions of World War II, such as the timing of the D-day invasion of France and the Navy and Marine Corps invasion and capture of Iwo Jima.

These major battle events did not happen in isolation, but were part of a strategic plan. Strategic events never happen in isolation, and that is a point well worth remembering.

In Part II of this article, I referred to the famous statement of Japan’s Adm. Isoroku Yamamoto, who in 1940 told the Japanese Premier Fumimaro Konoe, “If I am told to fight the Americans, I shall run wild for the first six months. I can promise to give them hell. But I have utterly no confidence for the second or third year.”

Yamamoto truly understood the policy and strategy implications of resource-poor Japan waging a major war against the United States, with its vast resources.

This was no idle comment by Yamamoto. The commander of the Imperial Japanese Navy was consistent in his beliefs, and in 1941 stated, “Anyone who has seen the auto factories of Detroit and the oil fields of Texas knows that Japan lacks the national power for a naval race with America.”

(Note: I wonder if there are any modern equivalents of Adm. Yamamoto in other countries making the same observations today and coming to a different conclusion?)

But there was a curious logic of politics and policymaking at work within the highest levels of Japan’s government in the late 1930s and early 1940s. It was Japan’s lack of resources, its self-perception of a “lack of national power” that prompted its leadership to mobilize the military and strike out in wars of expansion and conquest.

But for now, enough discussion of warfighting in World War II and the industrial planning that supported it in the United States. And we will discuss Japan further in this article, but with reference to postwar progress, not dwelling on the failed the Japanese war effort. (But I will return to these themes in future articles.)

For now, I am deliberately going to overstate what I believe to be the case with respect to U.S. energy policy and strategy. I am going to overstate the case just to be sure I am not understating it.

More on the “Free Market” as a Strategy

What is the basic fallback principle to which Americans tend to revert when confronted with hard questions of industrial policy? It is that “free markets” are generally better at organizing economic activity for wealth and profit and promoting general progress than are government plans? The idea of “government planning” is anathema to most Americans.

It brings to mind visions of the five-year plans of the Soviet Union, or the political discomfort of allowing the government to pick winners and losers, as in modern Japan. This strikes most Americans as just plain wrong. It is far better, goes the thinking, to allow people the freedom to take risks, and one hopes to come up with better ideas, if not better mousetraps.

The idea of a free market in goods and services is, in fact, such an icon of American economic belief that federal, state, and even local governments will go to the most extreme lengths to establish and enforce policies that ensure that so-called “freedom” reigns in the marketplace.

Localities across the land will, for example, license and regulate the humble hot dog peddler, so as to preserve the “free market” in taxpaying restaurants. Oh, wait a minute. That is not such a free market after all, is it?

So as things currently stand in the United States, the government regulates the air we breathe, the water we drink, the food we eat, the medicines we ingest, the content of the paint on the walls, the thickness of the sidewalk beneath our feet, and…you get the picture. All caricature aside, the American free market is hardly “free.”

Despite this apparent dichotomy of freedom through regulation, some people still ask questions along the lines of, “Why isn’t it enough to leave energy prices to market forces?” And that is a fair question. Let’s take it at face value.

There is a lot of evidence that the so-called free market in energy, particularly for oil and oil products, has worked well for many decades, bringing cheap energy to many people. So why is it necessary for the government, or anyone else, to “plan” for the energy future? Does the free market not work anymore?

And if the free market in energy supplies does not work, then what is the answer? After all, there is a great deal of evidence that the long lines for gasoline in the United States in 1974 were caused by government regulation of the product distribution channels, not because of the Arab oil embargo.

And even the recent spot shortages of fuel in some places in the aftermath of Hurricane Katrina were not really failures of the free market so much as they were related to the natural-social phenomenon of mass evacuations from coastal areas that occurred at the urging of government officials.

As things worked out recently, spiking gasoline prices served as one of the clearest of market signals that there was money to be made. So high prices for gas drew supplies of fuel product back into the otherwise barren marketplace. This is Economics 101-type stuff.

Industrial Policy on a National Scale

But look at the issue from the other direction. “Turn the map around,” as the Marines like to say. Look at your situation, and think about your plan, through the eyes and mind of your opponent. And consider the possibility that, from time to time, things change to the point that the old ways really no longer work, nor do the old constructs apply.

The great scholar of management Peter Drucker noted that some industries and some kinds of economic activity are clearly national in scale, and are thus the inherent province of national policy. The oil industry in general is clearly one of these types of economic activities.

For well over a century, the oil industry has been heavily scripted, regulated, and taxed, from the most remote field drilling prospect to the point where the gasoline pump nozzle enters the gas tank of the automobile at the humble point of purchase.

Moving back up the chain from the gasoline pump, the fact is that America purchases immense amounts of oil from abroad. And at the far distant end of that long chain of commerce, the United States has a global-scale military commitment to, as the saying goes, “ensure access” to these foreign oil supplies.

I am not trying to tell you something you do not already know, but instead point out the reality that the so-called free market in oil is not really free, or anything close to free. No big government, no cheap oil.

Ask yourself this question: “How much does a barrel of oil really cost?” Look beyond just the posted price on the New York Mercantile Exchange. To come up with an approximation of the true price for oil, you have to add in all of the external costs, such as the U.S. foreign military commitment that “ensures access” to the stuff. Then divide by the number of barrels produced.

Depending upon whose numbers you want to believe, the additional cost of the “security” component of a barrel of oil landed in the United States ranges from $20 per barrel to over $60 per barrel. So the true cost of oil to the U.S. economy may be close to twice the posted price.

(And the rest of the oil-using world, which does not directly pay the costs of the U.S. military commitment to “ensure access” otherwise picked up by the taxpayers of America, thanks us every day, as I am sure you, dear readers, have noticed. But I digress.)

Furthermore, an energy industry facing Peak Oil is even more so one of these types of industries of which Drucker wrote. In Part I of this article, I discussed the rather pessimistic views of James Kunstler about the U.S. energy future. And I discussed the somewhat more optimistic views of Peter Tertzakian.

No matter to which of these alternative futures you might subscribe, they both forecast that supplies of conventional crude oil will begin to tighten and then begin an irreversible decline down the Hubbert curve. In the end, things in the oil industry will become even more heavily scripted, regulated, and taxed.

The U.S. military commitment to “ensure access” to oil supplies will become even larger and more dispersed and more costly. And that is if everything holds together and follows current trends, and does not just blow up and spin out of control.

The core of the problem in all of this is that there is little or no strategic rationality to what is going on, certainly not in the United States. To the extent that there is any high-level planning in the U.S. energy arena, it is inadequate if it does not just plain stink. From an economic standpoint, Americans are using oil products not priced according to their true costs. Cheap gas and cheap money are simply incompatible over the long run. And maybe even over the short run, considering where we are now.

Tax Policy Is Energy Policy

Study after study in many different nations and economies has shown, for example, that the best way to avoid having to scramble for new supply sources of oil is to control the growth of demand, if not outright to reduce absolute demand.

In other words, it is not about “imports from the Middle East,” as referenced in the president’s State of the Union speech. It is all about aggregate demand for a depleting product. So is it possible to reduce aggregate demand? The short answer is yes — and I do not mean by using a totalitarian or authoritarian approach.

Consider Japan, a postwar industrial powerhouse, and now a respected parliamentary democracy that today uses less oil than it did in 1974. That is, after 32 years of economic growth (OK, including a severe recession in the late 1980s and 1990s), Japan is using less oil now than before, in an absolute sense.

So the case of Japan demonstrates that reducing absolute oil demand is possible over time. How does Japan do it? The short answer is with high fuel taxes and an emphasis at many levels on producing energy-efficient devices, particularly fuel-efficient cars (products that Japan then exports and sells in America, among other places).

Higher taxes on fuel at the gas pump in America would begin to do some of the trick of arresting growth in oil usage. But so far, politics in the United States have ruled out higher gasoline taxes even during the “cheap oil” days of the 1980s and 1990s.

I have heard intelligent people, including not a few politicians who are in a position to know better, describe it along the lines of “cheap gas is an American birthright.” (To which I have a two-word response: “Peak Oil.”)

So lacking a long-term approach to conserving a depleting asset, the default energy policy of the United States seems to be that the nation will buy and import a lot of oil from other nations, rather than pay high gas taxes.

This low-tax, high-demand situation in America sharply contrasts the energy situation in most other advanced economies on the world, particularly Europe and Japan (see above), where fuel taxes are hefty to say the least.

With low fuel taxes in the United States and high fuel taxes in Europe and Japan, it follows that the average fuel efficiency in the U.S. automobile fleet is somewhat less than half that of the automobile fleet in Europe. And the U.S. fuel-efficiency average is far less than half the average fuel efficiency of the Japanese automobile fleet.

This particular statistic concerning the comparative national average for fuel efficiency matters a lot when a nation uses as much gasoline every day as does America. Current U.S. daily gasoline demand is around 9.2 million barrels per day (it varies seasonally).

If the U.S. automobile fleet were just as efficient as the European fleet (a very big “if,” but work with me on this), that usage number would be about 4.6 million barrels of gasoline per day.

But still, it is possible that increased fuel-efficiency alone could “save” half of the gasoline used in the United States every day. And consider that it takes two barrels of oil, on average, to refine into one barrel of gasoline.

So “saving” 4.6 million barrels of gasoline per day is the equivalent of daily reducing crude oil usage by 9.2 million barrels, in a world that produces and consumes about 84 million barrels of oil per day. So what you might want to label as “excessive” U.S. gasoline demand alone, based simply on considerations of low mileage, accounts for as much as 11% of the total daily world oil demand, or an amount equal to the anticipated daily oil demand of China in 2010 (U.S. Department of Energy estimate).

The economic and policy arguments do not stop there, however. Low automotive fuel efficiency in America directly leads to higher levels of oil imports, higher demand, higher posted prices, and far more U.S. dollars sent overseas to pay for oil.

In the aggregate, then, the United States is spending hundreds of billions of dollars overseas, and in essence “decapitalizing” itself, so that many millions of drivers can sit in their cars and idle in traffic jams every day. Can you really say that this is the “free market” at work? What would Clausewitz say? I think he would call it bad policy and abysmal energy strategy.

This abysmal oil situation is so bad that it must be a reflection of an inherent flaw in the political and policymaking process. The current situation is so self-destructive to the nation over the long term, and such obviously bad policy, that it could not otherwise occur if the nation were, let’s say, at war.

(Oh, wait a minute. We are at war. Last I heard, it was going to be a “long war,” according to the Quadrennial Defense Review.) Think about it. Any general who proposed a warfighting strategy equivalent to the current so-called “energy strategy” to political leaders would lose his stars and be ushered off to retirement in the Old Soldiers’ Home.

Yet the policymakers in America move ahead as if by instinct, like moths to a flame, in an attempt to perpetuate a lost past receding before our eyes. (Well, OK, I admit that you have to understand how to view depletion at a global level. This is not for amateurs.)

And people in general wonder why they are less and less in control of their energy destiny, and bellyache that the nation is more and more at the mercy of the whims of other people in faroff places. The answer is as close as the driveway of the large house in the leafy suburb, many miles from the homeowner’s place of employment, which is a state of affairs due in large measure part to a legacy of low fuel prices, if not low fuel taxes.

The foregoing is merely one out of innumerable examples of long-term energy folly in the United States. But it illustrates that point that you have to think back “up the chain” to the bad policy and even worse state of politics. It highlights the point that the politics of energy in the United States tend to be ill informed to the point of being ignorant and self-destructive. The energy policy that flows from such bad politics is disjointed.

And how can any sort of “winning” energy strategy (let alone a survival energy strategy in a world that may already be at Peak Oil) emerge from this kind of mess? Recall what I said in Parts I and II of this discussion, referring back to Clausewitz: “While a failure of tactics or operations can doom the entire chain, a failure of policy and strategy will doom the entire chain.”

The New Strategic Realities of Energy

“Strategic Realities”? Sounds like a business school case, but that is not my focus. This discussion is more a mixture of graduate work in geology, plus a tour at an advanced war college. (Hint — like the one located at Newport, R.I.) The economics of energy have been fundamentally altered by the geological reality of Peak Oil, coupled with world demographic trends toward more people using more oil.

These key factors change the economics of energy, and hence impact the politics of energy at the very highest levels, and at the level of national policy. In this respect, America is late to the game — or should I say to “the great game.”

There has been up till now a stubborn refusal in the United States to face the facts of the Peak Oil reality. At some point, mere negligence becomes gross negligence becomes willful misconduct.

With rare exceptions like Rep. Roscoe Bartlett of Maryland (a conservative Republican, by the way), “power” is failing to speak truth to the people. It is left, then, for people somehow to speak truth to power, not unlike Adm. Yamamoto to Premier Konoe in 1940.

This is why I believe that it is important to discuss energy in terms of developing a true “energy policy and strategy” approach to an oncoming future characterized by declining supplies of crude oil, dramatically higher costs for the stuff, and immensely more political friction both home and abroad. Nothing is going to get easier. And crafting the outlines of a continuously evolving national energy strategy is not a simple matter.

A sound energy strategy will have to be adaptable to the dynamics of constant change in a competitive world. One thing for certain is that there is no one-shot, cookbook “energy strategy” that if only you follow the recipe will forever maintain some happy status quo.

Look around the world and you will see many nations that consider their energy resources, and associated production and distribution systems strategic assets, to a scale not even comprehensible to most Americans.

These overseas resources and related systems are considered, by their owners, to require management through a deliberate planning process sharply focused on national energy security and long-range, sustainable access to energy resources.

This does not necessarily mean that some government entity owns every oil well and every refinery, although in some countries, that is the case. But it does mean that the policymakers within the respective governments have decided to concern their national policy apparatuses at a strategic level with the sources and uses of energy and to focus on aspects that are deemed to be critical, particularly in the arena of sustainability.

Sweden, for example, has a national plan to become oil independent within 20 years, mostly by eliminating demand for petroleum in its industries and society. The Swedes fully intend to remain a developed nation and to provide a high-level quality of life to the population. But they will do it without relying on other people’s oil. Good for them. This is Swedish national policy, and the voters are coming onboard in ways that leave U.S. policy in the dust. Wow!

The list of other nations with what can only be termed “strategic plans” for their energy resources includes places that are important to the world of energy production and full of very intelligent people, despite any caricatures or stereotypes you may carry with you.

From Russia to Venezuela, from China to Iran, these are nations that have energy plans and policies and strategies for the 21st century. Some nations and plans may be better than others, but at least they have plans.

In America, there is a rather foolish tendency to belittle some of these other nations and their energy policies, if not to fear them. (Although, in the end, America winds up reacting to them.)

This is partly due to a poverty of imagination in the collective minds of U.S. leadership, such as when one member of Congress called the Swedes and their energy goals “quaint” and “not relevant” to the U.S. situation. I wonder if another high-ranking member of the U.S. government thinks that the Swedes are fortifying their “personal virtue” by striving to become oil independent within 20 years.

Oil independence is “not relevant”? Aggressive energy conservation measures are merely “personal virtue”? Famous last words, I suppose. This kind of thinking is pre-Peak Oil and all but endorses a national policy-by-default to foreclose any sense of adaptability to changes in the world of energy.

At the lofty levels of policymaking and strategy formulation, certainly concerning the future of energy supply for the United States and its allies in the world, there is no such thing as finality. The goal has to be to create a continuous process of policy-strategy formulation in the arena of energy that influences events such that things proceed to favor the interests of one party or another, and preferably favors our “side,” if any side is going to prevail.

Couple the current U.S. poverty of imagination in the arena of strategy with the evident raw suspicion and belligerent opposition on the part of U.S. leadership when some foreign nations adopt policies that are confrontational to U.S. entities and interests.

Sometimes, the United States acts surprised when other nations act in their own self-interest, when for one reason or another it is America that has made itself vulnerable to the whims and caprices of others. So what is the answer going forward? Change policy? Remake national energy strategy? Or do we really think that we can, as the saying goes, just “bomb them all back to the Stone Age?” Has that ever worked before?

For now, suffice to say that there are people in high places in other nations engaged in deliberate energy planning and formulating energy policy and strategy in their own ways. They are moving their pieces about on the chessboards of the world. And despite whatever sense of motion you may see within the U.S. leadership cadre, my opinion is that U.S. energy policy and strategy is unfocused and inferior to that of certain other nations.

Speaking of moving chess pieces about on the chessboards of the world, remember that the word “checkmate” is derived from the Farsi language of Persia, today known as Iran. In Farsi, the expression “shah mat” translates to “the king is defeated.” How is that for a fundamental “strategic” concept?

Until next time,

Byron W. King
April 12, 2006

Byron’s P.S.:If you enjoy this newsletter, and you live in Western Pennsylvania, we want to advise you of an opportunity to meet James H. Kunstler on Thursday, April 13, 2006 in Pittsburgh.

Mr. Kunstler is, as you may know, the author of such highly regarded books as The Long Emergency and The Geography of Nowhere. Recently we have reprinted some of Jim’s writings in The Daily Reckoning. Jim will be in Pittsburgh on Thrusday evening, April 13 to discuss his views on Peak Oil and the energy situation in the U.S. and the world.

Mr. Kunstler will be speaking on Thursday, April 13, 2006 at 7:00 PM at JOSEPH-BETH Books, 2705 East Carson Street, Pittsburgh, PA 15203 (telephone 412.381.3600).

Adding to the enjoyment of the festivities, our very own Byron W. King, Contributing Editor to Whiskey & Gunpowder and frequent Daily Reckoning commentator, will also be in attendance.

So add this event to your calendar, and join Jim and Byron for a Peak Oil evening.